CUTS Institute for Regulation & Competition Round Table Discussion on “Innovative Financing for Sustainable Infrastructure Development through Public-Private Partnership

Background

According to an estimate by the United Nations Conference on Trade and Development (UNCTAD), achieving the SDGs will require around US$5 to $7 trillion, with an investment gap in developing countries of about $2.5 trillion up-to 2030. The private sector contributes only around 10 percent of the current infrastructure investments globally. A recent report by the Business & Sustainable Development Commission estimates that achieving the SDGs could open up $12 trillion of market opportunities and create 380 million new jobs by 2030. It is widely believed that the development of sustainable infrastructure would mitigate environmental, economic, and social risks, as well as increase resource optimization. It has also tremendous potential to help achieve the Sustainable Development Goals (SDGs) and other sustainability-related targets set by international agreements. According to the OECD report, more than eighty percent of the SDG’s implementation would require the development of sustainable infrastructure in some form or the other.

To bridge the infrastructure deficit in developing countries like India, there is a growing emphasis on increasing the investments in physical infrastructure. In this context, it becomes very critical to attracting private investment through a slew of policy and regulatory incentives and ensure that infrastructure development becomes a driver to achieve the SDGs set by international agreements aligning with the national agenda. However, SDG related infrastructure are largely commercially not viable, thus unattractive for private sector players.

The Capital requirement for achieving Sustainable Development Goals (SDGs) related infrastructure is very large and only public financing would not be adequate. PPPs, although seemingly out of favor presently, would play an increasingly important role in harnessing private finance, which makes it imperative to develop innovative financing instruments to make available funds for these types of long term projects. Without such instruments, scaling up PPP programs to achieve the SDGs by 2030 would be a daunting challenge.

The round table discussion provides a unique platform to discuss the issues pertaining to SDG related infrastructure development through PPP route and how innovating financing could help bridge the funding gap in the sector.

Agenda

Registration: 14:15 to 14:30 Hrs.
Opening Address: 14:45 to 15:00 Hrs.
By Dr. Arvind Mayaram (Chairman, CIRC)

Session 1 (15:00 to 16:15 Hrs.)
Introduction to PPP for SDG’s
This session uncovers the need for private sector investments and the importance of PPP’s for developing sustainable infrastructure in developing countries for achieving SDG’s.

Panelist:
1. Mr. RCM Reddy – MD and CEO, IL&FS
2. Mr. Sidharath Kapur – Executive Director and Member
of the Board, GMR Airports Limited
3. Ms. Marije Broekhuijsen – WASH Specialist, UNICEF

Keynote Speaker:
Prof. Leena Srivastava – Vice Chancellor, TERI SAS

TEA (16:15 to 16:30 Hrs.)

Session 2 (16:30 to 17:45 Hrs.)
Long-term innovative financing mechanism for PPP projects
This session uncovers the huge financial requirements for developing sustainable infrastructure and how the required finance can be raised using new and innovative financing techniques.

Panelist:
1. Mr. Suneet Kumar Maheshwari – Founder & Managing Partner of Udvik Infrastructure Advisors LLP
2. Mr. Prassana Srinivasan – Sustainable Infrastructure Expert
3. Mr. Krishan Routela – Associate Project Officer (Infrastructure), ADB

Keynote Speaker:
Prof. Manipadma Datta – TERI SAS

Closing Address followed by High tea (17:45 Hrs.)

Proceedings of Round Table Discussion on “Innovative Financing for Sustainable Infrastructure Development through PPP”

Introductory Speech
Dr. Arvind Mayaram: Chairman, CIRC
Introducing the subject for discussion, Dr. Mayaram emphasized on the importance of sustainable development in the overall global order and requested the panel to touch upon some important aspects of sustainability and related investments. Highlighting the importance of financing in infrastructure development, he highlighted the growing deficit from government
budget basket and how that compels the government to go for tapping private investment in more than one-way. From 2006 onwards, there was a concerted effort from the government to bring in private capital to develop the infrastructure needs of the economy. If the economy has to grow at the rate of 7 to 8 percent, huge finances are required to sustain the growth. The 2030 agenda of UN Sustainable Development Goals (SDGs) fulfillment would require around 110 trillion USD of investment in infrastructure alone and with the green component; the investment would touch nearly to USD 150 trillion.

It is also estimated that governments on their own would not be able to finance the infrastructure required for implementing the 2030 agenda for sustainable infrastructure. SDG 17, which talks about partnership, would require the public sector joining hands with the private sector to mobilize required resources for the development of the infrastructure. The definition of sustainable infrastructure is well set in terms of addressing climate change covering the environmental concerns but misses out on the other two critical factors (i. e. ) financial sustainability and inclusiveness. Therefore, just creating an infrastructure might not solve the problems until unless it is sustainable over its complete life cycle of operation. Thus, operation and maintenance become very critical along with its commercial sustainability over the long term. In addition, while creating the infrastructure, it should be kept in mind that it should be all-inclusive (i.e.) it should be used by one and all without any discrimination of caste, community or segment of the society. It should cater to people who can afford and for those who cannot afford to pay for the services. In India, where we have around 50 million people below the poverty line and most of them are unable to pay for the basic amenities, it becomes a growing challenge for us to provide the benefits to the needy and in the same time ensure economic and commercial sustainability of the project.

Introduction for session 1: Introduction to PPP for SDGs

Introducing the aspects of session 1 of the round table “Introduction to PPP for SDGs”, Dr. Mayaram stressed on the definition of “sustainable infrastructures” and its meaning. Citing the example of creating infrastructure for water supply, he highlighted that in most of the cases wastewater reuse and recycle was ignored which negates the very definition of sustainability as mining of water and water level depletion is completely ignored. Very often, these components are missed from the projects monitored by the UN agencies and multilateral banks too. So it becomes imperative that while designing a project, these components need to be explored and addressed so that integrated projects can be created for long-term sustainability for the entire value chain rather than focusing on one element. Introduction for session 2: Long-term innovative financing mechanism for PPP projects

Introducing the aspects of session 2 of the round table “Long-term innovative financing mechanism for PPP projects”, Dr. Mayaram questioned the need for innovating financing or structuring the financing in an innovative way. He requested the panel to deliberate on where funds can be sourced for long-term infrastructure projects. Is tapping the pension funds
be a good idea? He cited the example of Australia pension funds plan, where the assets of near about 6 trillion dollars are utilized for different services like service, and better livelihood and good investment for their supports to get good long-term return.

In 2013- 2014, India experimented with concepts like Infrastructures Investment Trust which work as a channel for both debt and equity. Apart from these measures, what are other tools of financing that can be useful for the Indian context?

Session 1: Introduction to PPP for SDG’s
1. Professor Leena Srivastava:
Introducing the aspects of session 1 of the discussion, Professor Leena Srivastava started the session with a keynote followed by other panelists. She highlighted the huge funding requirement for sustainable infrastructure development and specifically mentioned the climate change concerns under SDG 13. She said that greedy humans are both victims and
contributors to climate change concerns.

– She highlighted major climate concerns as rising global temperature, extreme weather. She also attributed the bad air quality and transport congestion in Delhi as a creation of human actions and stressed that a fresh start is needed to address these issues, which require technology innovation and public funding.

– Highlighting the importance of developing integrated infrastructure, she said that services need to be included while developing the assets for long-term sustainability. A holistic plan including all sectors, bridging the divide between rural and urban is the need of the hour, which can minimize the vulnerability of any project. It is time to be flexible and think beyond centralized solutions.

2. RCM Reddy
Mr. Reddy stressed the role of PPP in developing social infrastructure such as education, skill, etc. He emphasized on creating a correlated framework towards SDG4, SDG8, and SDG9 to work for employability, skill, and education. Highlighting the partnership acronym, he said that public and private are equal partners and should share all risks and benefits. He highlighted several successful PPP models to drive his point’s home like Emergency Obstetric Care under Janani Suraksha Yojana, in Ahmedabad and Education Technology Infrastructure Services in southern states of India.

3. Marije Broekhuijsen
Ms. Marije from UNICEF focussed on the water and sanitation sector in India. She highlighted though the governments’ efforts were praiseworthy, people are less sensitive towards sanitation practices, hence investment in sanitation is either at the last priority in the radar or not at all priority. Therefore, there must be innovative and differential thinking to draw them to the creation of sanitation infrastructure and practices. Awareness creation should be a sustained effort from the government. The private sector can also play a major role in developing and maintaining the infrastructure involving the community as a shareholder to these initiatives. She stressed to set up special funds for social responsibility and maintenance of existing assets rather than the creation of new ones, which may be defunct after some time. Budgeting for the WASH sector should be given topmost priority from the government as well as rural and urban bodies.

She highlighted some phenomenal work done by Tata trust and Gujarat SAARC foundation wherein integrated facilities were developed and managed by the communities. She called on the fraternity to use and adopt smart solutions for sanitation issues.

4. Sidharth Kapur
Mr. Kapur strongly advocated PPP projects despite some failures in some segments of the economy. Talking about airport development in the country, he said that PPP played a major role in its development which has a positive impact on the overall economy and enhances the quality of life of the people in India.

Key takeaways from his speech:
– Defining infrastructure, he categorized it into two different segments like core infrastructure, which is easy to establish with very specific business models. Social infrastructure on the other side like water and sanitation, health faces an uphill task as private sector interest is low.

– Project financing still remains a concern as the requirement is very huge and ultimately the government has to step in for solving the problem. Talking about the alternatives, he cited the case of pension funds tapping for infrastructure projects but cautioned that the risk is also higher. Therefore, the government needs to take a balanced stand while dealing with public money, which can have an adverse political dividend. While dealing with private firms, complex concession terms, the role of the regulator becomes very important who can monitor and regulate so that deviations can be checked upon.

In the Q&A session, major concerns were shown towards addressing the sustainability issues and policy intervention measures from the government to tackle these problems. The panel was of the view that sustainability would require successful models in every sector to be scaled up so that private investments could be brought into and the government needs to work with private players as a true partner in sharing risks and rewards. Also, an overall institutional framework is needed which can address the integrated sectors rather going with unilateral directions is required for proper policy
interventions

Session 2: Long-term innovative financing mechanism for PPP projects
The session started with Dr. Mayaram giving a brief introduction to the panelist. A diverse panel with distinguished achievers from industry, multilateral bank, PPP expert and academia sharing the stage. Mr. Suneet Maheshwari was asked to start the discussion for the session.

1. Mr. Suneet Kumar Maheshwari
Touching upon the risk cycle of the project, Mr. Maheshwari highlighted that risk is much higher in the construction period and the initial operational years of the project. Thus, investors like to enter into any Greenfield projects but show much interest in brownfield projects. In his opinion, Institution structuring is far more important than the innovative financing instruments. Thus, streamlining the process is very crucial in PPP projects as another fall in line simultaneously…

The key point from his observations are highlighted below:

– India needs to have a consistent policy framework and flexible regulations on PPP. Once the investor develops confidence in the overall framework, policy, and regulations, sourcing capital will not be a challenge for any project.

– Insurance and pension funds for long term financing infrastructure projects might not be a good idea as uncertainty is too high in these types of projects and the government may not want to put that capital at risk. Also, there is a chance of
people losing all their savings and pensions in the long term. Short-term fixes are not the right way for a long-term solution. Credit enhancement for project developers would be a good idea, which requires enough projects to support the outcomes and change the overall perception of the funding community.

– On innovation of new financing tools for the PPP projects, he said that if we get our basic structure right, funding will happen naturally and there is no need in tweaking the way to bring in funds through innovative funding mechanisms.

2. Mr. Prassana Srinivasan
Mr. Srinivasan stressed upon starting the project right. He said that every project is different and that needs to be structured as per the requirement and not as per the available standard models. On financing, he pointed at the role of the government and even microfinancing institution for supporting the non-bankable and financial nonviable social sector infrastructure projects. If the end consumer is able to invest by using microfinancing facilities, the social sector project can turn out to be financially viable in the long run. The key point from his speech are as follows:

– In a PPP project where a controlled-pricing monopoly exists, user fees are subjected to political review and rates are fixed by the government. Hence there is always an upper cap on the returns for private party specially in social sector project like water and sanitation

– In India, a large number of the Indian population is not able to pay. Paying ability is limited and to counter that the government has to take the additional burden. However, many state governments lack the financial capacity to support such interventions.

– A project generally faces high risk during its initial years and start generating cash flows only after 3-4 years of operations. The period from financial close to operation involves high-risk and government support that may be needed during this phase. Also, in the current situation, predictability modeling in the project becomes an important tool to measure the bankability of the project.

– On social infrastructure projects, minimizing the cost of construction becomes the most important factor for making a project financial bankable. In contrast to other projects where users pay easily for the services, it is not the same for any social infrastructure projects.

– Microfinance can be one solution for the basic services of water and sanitation if it can be structured in such a way that it can be paid for a longer duration and combined with construction of Banks may be willing to lend after initial years of operation of the projects as they are looking for a long term relationship with the consumer.

– As a high failure rate in any sector will downgrade the credit rating of the promoters, it is required to be rightly structured. Bundled services framework can be one of the affordable and implementable solutions for social sector PPPs

3. Mr. Krishan Singh Rautela
Mr. Routela shared his experience regarding setting up the healthcare center in PPP mode in one of the remote areas of Uttarakhand to provide affordable services to the poor. He stressed that the government needs to send positive signals to generate interest from the private sector to participate and invest in a project of social and economic importance. To make a project viable government need to step in and need to pay a part of the user fee, while the other part is paid by those who can afford it. This modeling can be seen as an example of cross-subsidizing, where richer pay for the poor
with the support from the government

4. Professor Manipadma Datta
Professor Datta gave a completely different point of view and asked the regulator to find out a way to tax the richest to fund SDGs related infrastructure development. Talking about the realistic achievement of SDG by 2030, he pointed out that 170 odd tasks under 17 specified goals is a daunting task.

He opined that common people’s money in insurance or pension funds should not be touched to finance any PPP projects. Assets that do not have any intrinsic value should not be developed through the lifesaving of common man. Moreover, the government needs to look into the structuring of finance rather than eyeing into funds from taxpayers. He stressed that the right intent and proper policy and regulation is the key to attract private capital to the PPP projects.

Concluding remarks from Dr. Arvind Mayaram
The debt structure in India is not sophisticated and well structured. Reissue of debt or selling of debt after 3-4 years of the operation is not seen as an option for the banks as they are not willing to part away from operational and revenue-generating projects. Thus, refinancing becomes difficult. In addition, Take out pricing comes at a premium along with foreclosure charges and hence, results in double pricing. The growing NPAs and liquidity crunch in banks hold them not to invest further in any infrastructure projects.

Refinancing – recently staring to develop but the problem is that the bank does not want to let go when the project is in the running stage. For the big organization, where they get projects on their balance sheet financing with lower risk and lower cost of financing do not augur well for projects with high risk and return. In the long run, interest volatility will come down. The missing part in any PPP project is Partnership. The high handedness of the government authority poses a significant challenge to any PPP projects where they tend to transfer most of the risks to private players.

Regarding the accountability of the government on PPPs – an agreement under PPP includes performance guaranty and achievement of certain services levels, for that the operator is responsible and accountable not the government. Also, in a PPP arrangement investor need to be protected. If investor lose money, they charge their next investment at a premium, increasing the cost of capital for the projects.